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Finance Minister Carole James announced the BC NDP Government’s budget yesterday and delivered on a wide variety of promises from its election platform. The key initiatives were centered around housing speculation.

The provincial government released a 30-point plan addressing housing affordability in the province.

Highlights from the plan include:

• The introduction of a two per cent speculation tax (0.5 per cent for 2018, two per cent in 2019 onwards). The tax will be charged annually on the property’s assessed value. Despite the name, this appears to be an absentee / vacant home tax. Details are not yet final, but it appears the tax would be levied to foreign and domestic investors who do not pay tax in B.C. Principal residences and long-term rentals would be exempted.

• Increase to the Foreign Buyer’s Tax (FBT) from 15 per cent to 20 per cent. Until now, the FBT only applied to home sales in Metro Vancouver; however, the NDP will extend this to other parts of the province including the Fraser Valley, Central Okanagan, Capital Regional District and Nanaimo.

• The Property Transfer Tax on sales of homes worth more than three million dollars will increase from three per cent to five per cent.

• Increase the School Tax on homes worth more than three million dollars.

• Elimination of the BC Homeowner & Equity Partnership. Applications will be accepted until March 31, 2018.

• Moving to stop tax evasion on pre-sale condo reassignments. The government will require developers to collect and report information about the assignment of the pre-sale condo purchase.

• Expanding benefits to low-income families and seniors living independently. The 2018 budget will increase benefits under the Renter Assistance Program (RAP) and Shelter Aid for Elderly Renters (SAFER) programs.

• Empowering home owners in Stratas to deal with short-term rentals. The budget will allow strata corporations to increase fines for homeowners who ignore short-term rental rules.

• Various measures to ensure proper enforcement and coordination with tax authorities on the above changes.

The past few months has seen an increase in mortgage lending rates, the introduction of a stress-test in mortgage lending criteria, and now measures to curb housing speculation in BC. These are all headwinds for housing prices in Vancouver, and, in theory, should have a cooling effect on future price movements. However, the local market has been resilient to changes made in the past few years and only time will tell if these new rules will have an impact.

Of course, housing was not the only issue addressed in the budget. Below is a summary of other key announcements:

• Affordable childcare. The NDP did not deliver on its $10 a day childcare election promise. However, they did introduce a new child care program that makes care effectively free for families with income below $45,000 and offers subsidies for families with income of between $45,000 – $111,000.

• The elimination of Medical Services Plan premiums by 2020 to be replaced by a payroll health tax for businesses. The payroll tax will apply to businesses with payroll in excess of $500,000. The rate will be tiered from $500,000 to $1,500,000 and top out at 1.95 per cent for businesses with payroll over $1.5 million.

• Increase in the BC Carbon Tax to $5 per tonne per year, adding $212 million a year.

• An increase in tobacco tax from 24.7 cents per cigarette to 27.5 cents.

• The luxury surtax on vehicles worth more than $150,000 will increase from 10 per cent to 20 per cent.

For 2018, the government is projecting a $151 million surplus. Interestingly, there’s a new line that wasn’t in previous budgets. It’s called “surplus before ICBC impacts”, and it shows a projected $903 million surplus for next year — but also a projected $1.076 billion loss from ICBC.

The fiscal state of ICBC has been well documented in recent weeks. Attorney General David Eby announced a variety of reforms earlier this month, such as caps on pain and suffering for minor injuries. The government estimates these reforms will save ICBC $392 million this year, but concedes that there’s no way of knowing to what extent the reforms will influence drivers and trial lawyers.

“The Stock Market is a device for transferring money from the impatient to the patient” – Warren Buffett

North American Major Markets Recover

This week saw North America’s main stock indexes recover from last week’s nine per cent loss. The Dow Jones Industrial Average (DJIA) rose by 1,028 points this week to finish at 25,219. This 4.25 per cent gain erased roughly half of last week’s drop. The S&P 500 gained 4.27 per cent on a 112-point increase, finishing at 2,732. The NASDAQ gained 365 points this week – good for a 5.31 per cent jump – to finish at 7,240.

All three major American markets are again positive on the year.

Toronto’s S&P/TSX Composite Index did gain 418 points this week, good for a gain of 2.78 per cent; however, the TSX remains down on the year by 4.66 per cent. 2017 saw the TSX get outpaced by American and many global markets, and so far in 2018, that trend has continued – being overweight Canadian is not an ideal spot for portfolios. Contact us if you have any questions or concerns about your portfolio’s allocation.

2017 RRSP Contribution Deadline – March 1, 2018

We’d like to remind you again that this year’s RRSP deadline is now only 13 days away. The last day to contribute is March 1st.

Let us know if you would like to make a contribution.

Weekly Market Wrap-Up

North America

The TSX closed at 15453, up 418 points or 2.78% over the past week. YTD the TSX is down -4.66%.

The DOW closed at 25219, up 1028 points or 4.25% over the past week. YTD the DOW is up 2.02%.

The S&P closed at 2732, up 112 points or 4.27% over the past week. YTD the S&P is up 2.17%.

The Nasdaq closed at 7240, up 365 points or 5.31% over the past week. YTD the Nasdaq is up 4.88%.

Gold closed at 1348, up -19.00 points or 2.51% over the past week. YTD gold is up 2.90%.

Oil closed at 61.65, up 2.60 points or 4.40% over the past week. YTD oil is up 2.04%.

The USD/CAD closed at 0.79666, up 0.0014 points or 0.17% over the past week. YTD the USD/CAD is up 0.17%.

Europe/Asia
The MSCI closed at 2131, up 86 points or 4.21% over the past week. YTD the MSCI is up 1.33%.

The Euro Stoxx 50 closed at 3427, up 101 points or 3.04% over the past week. YTD the Euro Stoxx 50 is down -2.20%.

The FTSE closed at 7295, up 203 points or 2.86% over the past week. YTD the FTSE is down -5.11%.

The CAC closed at 5282, up 203 points or 4.00% over the past week. YTD the CAC is down -0.58%.

DAX closed at 12452, up 344.00 points or 2.84% over the past week. YTD DAX is down -3.61%.

Nikkei closed at 21720, up 337.00 points or 1.58% over the past week. YTD Nikkei is down -4.59%.

The Shanghai closed at 3199, up 69.0000 points or 2.20% over the past week. YTD the Shanghai is down -3.27%.

Fixed Income
The 10-Yr Bond Yield closed at 2.88, up 0.0500 points or 1.77% over the past week. YTD the 10-Yr Bond is up 20.00%.

The DOW and S&P 500 are down about 10 per cent from their highs two weeks ago.

In absolute terms, the two 1,000+ point falls are the largest daily point losses in DOW history. However, the index has increased so much that comparing today’s point losses to previous eras is not relevant. The DOW has doubled in value in seven years and we must get used to seeing larger daily point movements.

In percentage terms the Dow’s 4.6 per cent loss on Monday was the worst since August 2011 and falls outside the top-20 of all-time losses. It was just the 25th worst loss since 1960.

The Dow’s largest one-day percentage loss was the 22.6 per cent Black Monday crash on Oct. 19, 1987. In point terms, that was “only” 508 points. In second place, the Dow crashed 12.8 per cent on Oct. 28, 1929. It retreated just 38 points that day.

The pullback has only reverted prices to where they were in December. The one-month chart looks scary….

….however, it barely registers on the three and five-year charts:

The volatility we’re experiencing this week is due to a technical, market structure event – not a fundamental one. Monday’s dramatic sell-off was a function of large U.S portfolios and pension funds rotating away from strong performing equity investments to strategically re-balance portfolios. The overwhelming nature of this move was exacerbated by robotic trading price sets and momentum technicals and then further compounded by retail trading. This is not a repeat of 2008, where we witnessed a credit event and a housing-related issue (sub-prime mortgage market collapse).

Earnings season has been positive with Q4 earnings on the S&P 500 on track for the most beats this cycle. We still have an environment with coordinated global economic growth, and provided market volatility does not erode broader confidence, the underlying fundamental picture remains supportive. We are in an economic world that is positive and continuing to expand. With that said, we are in the later stages of the market cycle. Because of elevated valuations and central bank renormalization, we should expect more volatility in the next five years than the previous five years.

Conclusion

Pullbacks are normal. Five per cent corrections happen on average three times per year. In the last 30 years, there have been 30 months during which global equities have fallen by at least 6.3 per cent in six business days. Markets took on average four months to recoup the loss.

What Can You Do?

For investors in the accumulation phase, this is good news. You are now able to purchase units at lower entry prices. We feel much more comfortable deploying money into portfolios than we did a month ago. This pullback coincides very well with RRSP season and now is a great time to make a purchase. Do not worry about trying to time the bottom perfectly. History has shown time and time again that buying on dips such as this one will lead to favourable results in the future.

For retired or soon to be retired investors, please try to ignore the noise. This is the reason we select a more conservative investment to fund your monthly payments. Your short-term cash flow is not fully exposed to markets, and the balance of your portfolio has enough time to recover from dips.

Please feel free to contact us anytime with any questions or comments.

From the entire You First team, Happy Family Day weekend!

Weekly Market Update – By The Numbers

North America

The TSX closed at 15035, down -571 points or -3.66% over the past week. YTD the TSX is down -7.24%.

The DOW closed at 24191, down -1330 points or -5.21% over the past week. YTD the DOW is down -2.14%.

The S&P closed at 2620, down -142 points or -5.14% over the past week. YTD the S&P is down -2.02%.

The Nasdaq closed at 6875, down -366 points or -5.05% over the past week. YTD the Nasdaq is down -0.41%.

Gold closed at 1315, down -15.00 points or -1.42% over the past week. YTD gold is up 0.38%.

Oil closed at 59.05, down -6.04 points or -9.28% over the past week. YTD oil is down -2.27%.

The USD/CAD closed at 0.7953, down -0.0091 points or -1.13% over the past week. YTD the USD/CAD is unchanged 0.00%.

Europe/Asia

The MSCI closed at 2045, down -168 points or -7.59% over the past week. YTD the MSCI is down -2.76%.

The Euro Stoxx 50 closed at 3326, down -197 points or -5.59% over the past week. YTD the Euro Stoxx 50 is down -5.08%.

The FTSE closed at 7092, down -351 points or -4.72% over the past week. YTD the FTSE is down -7.75%.

The CAC closed at 5079, down -286 points or -5.33% over the past week. YTD the CAC is down -4.40%.

DAX closed at 12108, down -677.00 points or -5.30% over the past week. YTD DAX is down -6.27%.

Nikkei closed at 21383, down -1892.00 points or -8.13% over the past week. YTD Nikkei is down -6.07%.

The Shanghai closed at 3130, down -332.0000 points or -9.59% over the past week. YTD the Shanghai is down -5.35%.

Fixed Income

The 10-Yr Bond Yield closed at 2.83, down -0.0200 points or -0.70% over the past week. YTD the 10-Yr Bond is up 17.92%.

“There is a very easy way to return from a casino with a small fortune: go there with a large one” – Jack Yelton

TSX Down for the Week

The Toronto Stock Exchange’s S&P/TSX composite index rose on Friday by 35.21 points (0.22 per cent) and finished at 16,239.22. The financials sector was the lone loser on Friday, as the other nine of 10 main groups ended higher.

On the week, the TSX was down 114.24 points (0.70 per cent), as the Canadian market continues its recent trend of being outpaced by the U.S. markets. It certainly isn’t paying to be overweight in Canadian equities these days.

The Canadian Dollar rose 48 basis-points to sit at 81.25 cents (as at 3:50pm PST) versus the U.S. Dollar, as the Greenback softened.

West Texas Intermediate (WTI) jumped 63 cents per barrel to finish at $66.14 USD per barrel.

Gold dropped $14.20 USD an ounce on Friday (down 1.04 per cent), and finished at $1,348.70 USD an ounce.

All Three Major U.S. Indexes Set Record Closing Highs for Friday, and the Week

This week’s close capped the best four-week run for the three main U.S. indexes (NASDAQ, Dow Jones Industrial Average, S&P 500) since 2016. This week’s gains were spurred on by strong earnings reports, along with a softening U.S. dollar, which is benefitting exporters and multinationals.

The Dow Jones Industrial Average (DJIA) gained 223.92 points (0.85%) on Friday to close at 26,616.71, yet another record close. For the week, the DJIA was up 544.99 points (2.09 per cent).

The S&P 500 gained 33.62 points (1.18 per cent) Friday to close at 2,872.87, a gain of 62.5 points (2.23 per cent). Fourth quarter earnings for the S&P 500 has been estimated at 13.2 per cent, with 79.7 per cent of the 133 companies who have reported earnings so far beating expectations.

Finally, the NASDAQ jumped 94.61 points Friday (up 1.28 per cent), to close at 7,505.77, a gain of 169.39 points or 2.31 per cent.

U.S. Treasure Secretary Steven Mnuchin, while in Davos, Switzerland for the 2018 World Economic Forum, took a position opposite to the traditional U.S. position on the Greenback. He stated, “obviously, a weaker dollar is good for us (the U.S.) as it relates to trade and opportunities”.

His comments drove the Greenback to three-year lows on Wednesday. Interestingly, he made this comment only a day after U.S. President Trump – also in Davos for the 2018 WEF – called for a stronger Greenback.

Everyone knows that this growth won’t continue unabated forever; however, those with appropriate U.S. exposure in their portfolios are certainly benefitting in the short run. If you have questions about your portfolio’s allocation, let us know, and we can give you an updated outlook on your portfolio & adjust where necessary.

Weekly Market Wrap-Up

North America
The TSX closed at 16239, down -115 points or -0.70% over the past week. YTD the TSX is up 0.19%
The DOW closed at 26617, up 545 points or 2.09% over the past week. YTD the DOW is up 7.68%
The S&P closed at 2873, up 63 points or 2.24% over the past week. YTD the S&P is up 7.44%
The Nasdaq closed at 7506, up 170 points or 2.32% over the past week. YTD the Nasdaq is up 8.74%
Gold closed at 1349, up -7.00 points or 1.28% over the past week. YTD gold is up 2.98%
Oil closed at 66.24, up 2.71 points or 4.27% over the past week. YTD oil is up 9.63%
The USD/CAD closed at 0.8125, up 0.0126 points or 1.58% over the past week. YTD the USD/CAD is up 2.16%

Europe/Asia
The MSCI closed at 2234, up 37 points or 1.68% over the past week. YTD the MSCI is up 6.23%
The Euro Stoxx 50 closed at 3647, down -2 points or -0.05% over the past week. YTD the Euro Stoxx 50 is up 4.08%
The FTSE closed at 7666, down -65 points or -0.84% over the past week. YTD the FTSE is down -0.29%
The CAC closed at 5529, up 2 points or 0.04% over the past week. YTD the CAC is up 4.07%
DAX closed at 13340, down -95.00 points or -0.71% over the past week. YTD DAX is up 3.27%
Nikkei closed at 23632, down -176.00 points or -0.74% over the past week. YTD Nikkei is up 3.81%
The Shanghai closed at 3558, up 70.0000 points or 2.01% over the past week. YTD the Shanghai is up 7.59%

Fixed Income

The 10-Yr Bond Yield closed at 2.66, up 0.0200 points or 0.76% over the past week. YTD the 10-Yr Bond is up 10.83%

As we enter 2018, we would like to provide you with an overview of financial market results from the past 12 months, and to offer insights into some of the investment themes that may influence your investment portfolio over the coming year.

Several inquiries have come in concerning the current valuations of markets, where we are in the market cycle, and how to tackle current issues like NAFTA, interest rates, and tax reform. For this year’s outlook, we decided on a more visual approach and we hope that the graphics below will provide some guidance on these issues.

You will quickly notice that there are both optimistic and pessimistic charts. This was done purposely to provide a balanced view of the present investment landscape. Capital markets are complex and there are many data points to consider. Unfortunately, the situation cannot be simply summed up as “good” or “bad.”

Please feel free to contact us for elaboration on anything discussed in our newsletter.

#2: Every major bank and investment firm releases an annual market forecast. Below is the forecast from the TD Wealth Asset Allocation Committee (WAAC). Given current valuations and growth prospects, TD suggests maintaining U.S. equity content, decreasing Canadian equity, and increasing International equity. Although not included here, RBC Global Asset Management’s (RBC GAM) forecast has a very similar outlook.

#3: Also from TD Wealth, below is a summary of the opportunities and risks weighing on markets.

#4: NAFTA Renegotiation Scenarios. Courtesy of RBC GAM, this table plots four possible outcomes to the NAFTA talks and the potential impact on the North American economy.

#5: Also from RBC GAM, a table summarizing the impact of Trump’s proposed tax reform plan. The key takeaway is that markets have already “priced in” the positive impact of the tax plan.

#6: How does the current bull market compare to previous ones? Since 1929, the S&P 500 has had 10 market corrections (defined as a 20 per cent drop or more). The last correction was the global financial crisis in 2008. Markets bottomed out in March 2009 and we have been in a bull market since. From both a duration and return standpoint, this is the second longest bull market on record.

Also note that the average length of a bear market is only 24 months compared to 54 months for a bull market.

#7: How expensive is the U.S. market? If the previous slide provided you with cause for concern, this one is reason for optimism. Despite a 295% run-up since March 2009, the S&P 500 is not as expensive as you might believe. Price/Earnings (P/E = current stock price over the predicted next annual earnings period) is a very basic market valuation metric. The 25-year average P/E for the S&P 500 has been 16x and the current P/E is 18.2x.

#8: Consumer Confidence and the Stock Market. This is the investor psychology chart. Notice how peak consumer confidence tends to precede a recession? The time to invest is when we’re anxious about markets. The time to stay put is when we’re euphoric about them.

#9: S&P 500 intra-year declines and calendar year returns. The “short-term noise” chart. Despite average annual intra-year declines of 13.8%, the S&P 500 has had positive returns in 29 out of 38 years.

#10: Canadian and U.S. debt ratios and the labour market. Canadian households are more indebted than the U.S., but our labour market is healthier.

#11: Cryptomania. The meteoric rise of cryptocurrencies. The Crix cryptocurrency index grew by 38x in less than a year. Most analysts have defined this growth as a classic bubble, eclipsing all previous historical bubbles like the Nasdaq in the 90s, Gold Spot in the 70s and 80s, the Nikkei in the 70s and 80s, and even the Tulip bubble of the 1630s!

We were going to warn against trying to purchase into such a speculative asset class, but it seems the market has done this for us. As of the time of writing, the index has fallen 35% from its high on January 7.

#12: Impact of a 1% Rise in interest rates: On January 17, the Bank of Canada increased its key interest rate by 0.25% for the third time in six months. When rates rise, bond prices fall. The chart below plots the impact of a 1% rise in rates. It assumes a parallel shift (every part of the yield curve moves by 1%). UST stands for U.S. Treasuries (U.S. Government Bonds).

#13: Global Purchasing Manufacturing Index (PMI) for Manufacturing. The PMI is one of many gauges of economic strength. A PMI score of over 50 represents expansion of the manufacturing sector when compared to the previous month. A PMI reading under 50 represents a contraction. Every major developed nation had positive manufacturing data in the last half of 2017.

#14: Finally, the “what do I make of all this?” chart. Diversification and asset allocation are terms used endlessly in our industry, but that’s because they work. The preceding 13 charts have shown that there is both positive and negative data and it is near impossible to make (successful) big bets or major tactical changes on a year to year basis.

This final chart ranks the best to worst performing asset classes (from top to bottom) since 2003. As you can see, there is no discernible pattern. The grey box is asset allocation and shows you that a diversified portfolio will never be the best, never be the worst, but generally be “good enough” in the long-term.

Overall, we believe there are more positive takeaways than negative ones. Improving global growth and the continuation of accommodating monetary policy are two key drivers that should create an upward bias in equity markets. That doesn’t mean we will never experience a correction, particularly in the U.S., but it does suggest it could be shorter-term in nature.

I would like to close by wishing you a very happy, healthy New Year and to thank you for the continued opportunity to work with you as your financial planner. If you have any questions about your portfolio, or would like to discuss any changes, my team and I are more than happy to help.

The deadline to make an RRSP contribution for the 2017 tax year is March 1, 2018. Most of you are familiar with the basic mechanics of the RRSP and its use as a long-term retirement vehicle. You are also likely aware of the RRSP Homebuyer’s Plan (HBP) which allows you to withdraw up to $25,000 from your RRSP for the purposes of buying your first home.

The RRSP also offers other, more immediate advantages. If you are a parent, student or recently laid off employee, here are three ways you can benefit from an RRSP contribution:

Parents: An RRSP contribution will increase your Canada Child Benefit (CCB). Every parent with children under the age of 18 receives CCB payments from the federal government. For each child aged 0-5, there is a maximum benefit of $6,400. For each child aged 6-17, there is a maximum benefit of $5,400.

The benefit amount is calculated based on the family income for the previous tax year and it is subject to clawback starting at the $30,000 mark. Here’s the clawback table (click to enlarge):

For example, a family with 2 children and total household income of $120,000 is subject to a 5.7 per cent CCB clawback on each additional dollar of income. Therefore, when someone in that household makes an RRSP contribution, they are not only saving taxes at their marginal tax bracket (28-40 per cent), they are also increasing their CCB payment for the next year by 5.7 per cent!

Students: Similar to the Homebuyer’s Plan, with the Life Lifelong Learning Plan (LLP) you can withdraw up to $10,000 in a calendar year twice in a five-year period for the purposes of attending a qualifying educational institution.

Employees: Have you recently been laid off or lost your job and been given a severance package? This severance will be considered standard income, and therefore, it will be taxable in full. However, room-permitting, you can contribute some or all of your severance into your RRSP to avoid paying taxes on it.

In addition, for every year prior to 1995 that you worked with the employer you’ve just been laid off from, you get an additional $2,000 in RRSP limit to help mitigate the tax implication of your (potentially large) severance payout.

Bonus Coverage: A Cautionary Tale

Do you have a pension through your work? Does your workplace pension function as your primary retirement income vehicle? That’s great… as long as the company remains afloat. But if the company files for bankruptcy, some or all of your pension may be at risk.

Imagine having what you feel to be a solid retirement plan, with multiple income streams lined up: Canada Pension Plan, Old Age Security (for now), and your workplace pension, perhaps some rental income or some small investment income. Now, imagine up to half that income disappearing virtually overnight. It’s not impossible.

For a very recent example, take the downfall of Sears Canada. Long-time workers and retired pensioners alike were delivered the news that Sears Canada entered bankruptcy protection on June 22nd, 2017. Now these long-serving, loyal employees and retirees will see their pensions slashed by about 19% at a minimum. That figure could also increase in the future.

What is the lesson here? From the perspective of the saver, the lesson is simple: do not rely on any one income stream at retirement, no matter how seemingly foolproof. As much as you are able to, diversify your savings and save for your retirement using a tax-sheltered vehicle such as the RRSP.

You will get a tax savings on your subsequent return, your RRSP will grow in a tax-sheltered environment, and most importantly, you have control of your RRSP. So take action, as even a small amount now makes a big difference later.

If you have any questions about these tips, please don’t hesitate to reach out to us.

Next week, we will send out an RRSP deadline reminder to all eligible clients.